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Taxation - Indirect Taxes
Certain recent legal developments and case laws in this practice area are set out below.
Service Tax
Rate of Service Tax Hiked
Service tax rate has been increased from 10% to 12% thereby increasing the effective rate to 12.36% w.e.f. April 1, 2012 vide Notification No. 2/2012 - Service Tax dated the March 17, 2012.
Certain recent legal developments and case laws in this practice area are set out below.
Service Tax
Rate of Service Tax Hiked
Service tax rate has been increased from 10% to 12% thereby increasing the effective rate to 12.36% w.e.f. April 1, 2012 vide Notification No. 2/2012 - Service Tax dated the March 17, 2012.
Meaning of the Expression ‘Gross Amount' under Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007
It has been clarified vide Circular No. 150/1/2011-ST Dated: February 8, 2012 that inclusion of value of free-of-cost supplies of goods and services in or in relation to the execution of works contract in the ‘gross amount' for the purpose of payment of service tax on works contract under the composition scheme, is a legal requirement, only with effect from July 07,2009 when the explanation became a part of Rule 3(1).
Service Tax on Construction Services
Clarification has been issued in respect of various business models followed under commercial and industrial construction service and construction of complex service vide Circular No. 151/2/2012-ST Dated: February 10, 2012:
a. Tripartite business model (i.e. where builder undertakes construction for customers on land provided by a land owner) - (i) For the period prior to July 01,2010, construction service provided by the builder/developer will not be taxable, in terms of Board's Circular No.108/02/2009-ST dated 29.01.2009 and (ii) For the period after July 01,2010, construction service provided by the builder/developer is taxable in case any part of the payment/development rights of the land was received by the builder/ developer before the issuance of completion certificate and the service tax would be required to be paid by builder/developers even for the flats given to the land owner;
b. Redevelopment including slum rehabilitation projects for land owned by society to society member or other customers - (i) Re-construction undertaken by a building society by directly engaging a builder/developer is not chargeable to service tax as it is meant for the personal use of the society/its members. Construction of additional flats undertaken as part of the reconstruction, for sale to the second category of service receivers, is also not be a taxable service, during the period prior to July 01,2010;(ii) For the period after July 01,2010, construction service provided by the builder/developer to second category of service receivers is taxable in case any payment is made to the builder/ developer before the issuance of completion certificate;
c. Investment model where the project is offered to customers before commencement - After July 01,2010, investment amount shall be treated as consideration paid in advance for the construction service to be provided by the builder/developer to the investor and the said amount would be subject to service tax. If the investor decides to exit from the project at a later date, either before or after the issuance of completion certificate, the builder/developer would be entitled to take credit under rule 6(3) of the Service Tax Rules, 1994( to the extent he has refunded the original amount). If the builder/developer resells the flat before the issuance of completion certificate, again tax liability would arise;
d. Conversion model where untaxed construction /complex or part thereof into a building or civil structure to be used for commerce or industry, after lapse of a period of time is not a taxable service, unless conversion falls within the meaning of commercial or industrial construction service;
e. Build Operate Transfer model where transactions involving services take place at three levels being GOI or its agency and the concessionaire; secondly, between concessionaire and the contractor and thirdly, between concessionaire and users, all in terms of specific agreement. At the first level, GOI or its agency is providing ‘renting of immovable property service', at second level service tax is payable on the construction service provided by the contractor to the concessionaire and at third level, service tax is leviable on the taxable services provided by the concessionaire to the users like ‘renting of immovable property service', ‘business support service', ‘management, maintenance or repair service', ‘sale of space for advertisement';
f. Joint development agreement model where a new entity is formed to undertake construction - Service provided by each of the person i.e. the ‘new entity'/ builder or landowner, as the case may be, is liable to service tax under applicable service head.
Excise Laws
Rate of Excise Duty
The standard excise duty rate is being increased from 10% to 12%. As such the new effective rate is 12.36% (including education cess and secondary and higher education cess) w.e.f. March 17, 2012 vide Notification No. 5/2012-CE to No. 19/2012-CE dated March 17, 2012.
Clarification on Applicability of Duty on iron ore and iron Ore concentrates
It has been clarified vide circular No. F. No.332/1 /2012-TRU by Central Board of Excise and Customs that "Iron ore lumps and fines" are not dutiable as "concentrates" when subjected to crushing, screening, sizing or washing etc. This is basis clarification by Ministry of Mines that no special treatment is involved in the crushing and screening of ore and the end product can be termed as a concentrate only when the grade of ore is sufficiently improved through beneficiation. Further, Federation of Indian Mineral Industries has also pointed out that several processes (in addition to crushing and screening) such as milling, hydraulic separation, magnetic separation, floatation & Concentrate thickening have to be undertaken for ores to be converted into concentrate.
Customs Laws
Rate of Duty
There is no change in basic customs duty rate. Changes in effective customs duty are due to CVD increase from 10% to 12% and exclusion of cess on CVD w.e.f. March 17, 2012 vide Notification No. 13 and No. 14 /2012-Customs. Dated March 17, 2012.
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Customs duty |
Old |
New |
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Effective duty |
26.84 % |
28.85 % |
Adoption of uniform Customs Procedure for calculating the contents of Iron Ore
It has been clarified vide circular No. 04/2012 - Custom, Dated: February 17, 2012 for the purpose of charging of export duty the assessment of Iron ore for determination of Iron contents shall be made on Wet Metric Ton basis which in other words mean deducting the weight of impurities (inclusive of moisture) out of the total weight/gross weight to arrive at net Iron Fe contents.
Export Promotion Capital Goods Scheme is Available For Import of Capital Goods and Spares From SEZ
Directorate General of Foreign Trade ("DGFT") has clarified that capital goods sourced from SEZ are treated as ‘imported goods' and as such, Export Promotion Capital Goods Scheme-under Para 5.2A of the Foreign Trade Policy is available for import of spares for such imported Capital Goods (i.e. sourced from SEZ).
Case Laws
Service Tax
Maharashtra Chamber of Housing Industry And Another Vs Union Of India And Others
The assessees sought to challenge the constitutionality of the explanation inserted by Finance Act, 2010 to the commercial or industrial construction and construction of a complex, clause (zzq) and clause (zzzh) of Section 65(105) of Finance Act, 1994 respectively. Vide the said explanation, the construction of a new building or complex is by a deeming fiction treated to be a service when - (i) The construction is intended for sale; and (ii) Some receipt is envisaged before the grant of a completion certificate by the appropriate authority. Also, clause (zzzzu) of section 65(105) of the Finance Act, which treats provision of preferential location or development by a builder to a buyer as a taxable service was challenged. The High Court of Bombay has upheld the validity of explanation to clause (zzq) and clause (zzzh) on the ground that the charge of tax is on the activity involving the provision of a service by a builder to the buyer in the course of the execution of a contract. Further, clause (zzzzu) has been held to be constitutional on the ground that where service is rendered in the context of a location, it does not constitute a tax on land.
Excise duty
M/S Flex Engineering Limited v. Commissioner of Central Excise, U.P.
The assessee company was engaged in the manufacture of various types of packaging machines, marketed as automatic form fill and seal machines. It availed benefit of MODVAT credit in respect of certain inputs used for testing the F&S machine. On the ground that they have used the said material for the purpose of testing the final product i.e. the excise authorities sought to deny any credit on the basis that they have used the said material for the purpose of testing the final product i.e. the F&S machine which cannot be treated as inputs as stipulated in Rule 57A of the Central Excise Rules, 1944. The SC has held that the credit is available to assessee on the basis that physical presence of an input in the final finished excisable goods is not a pre-requisite for claiming MODVAT credit under Rule 57A of the rules. It has further held that since manufacture is intrinsically integrated with marketability, the process of manufacture will not be said to be complete till the time the machines meet the contractual specifications and that will not be possible unless the machines are subjected to individual testing.
VAT/ CST
State of Gujarat & Ors v. Essar Oil Ltd & Another
The said case pertains to benefit of sales tax incentive under the Government of Gujarat Capital Investment Incentive to Premier/Prestigious Unit Scheme, 1995-2000 ("Scheme"). The Scheme envisaged grant of sales tax incentives by way of sales tax exemption or sales tax deferment or composite schemes, for premier/prestigious units according to the location, investment and status of the project. Essar Oil, the assessee opted for deferment option under the Scheme.
Essar was supposed to commence commercial production by stipulated date which it failed to do. Further, it was told by industries commissioner that date cannot be extended. The SC has held that the exercise undertaken by the HC in the impugned judgment by directing various adjustments which virtually re-wrote the State's exemption scheme, is an exercise which is, with great respect, neither warranted in law nor supported by precedents. The Court held further that there is no question of equity in an exemption which is a stand alone process. Either an industry claiming exemption comes within it or it does not.
M/S G S Lamba & sons Mr Gurusharan Singh Lamba and others v. State of Andhra Pradesh
Andhra Pradesh HC has held that hiring of transit mixers amounts to transfer of rights to use goods and as such, leviable to sales tax. The decision is basis that the vehicles were maintained by the assessee, which included appointment of drivers and fixing roster. The licences, permits and insurances were taken in customers name. The transit mixers went to customer plants where they are loaded with concrete and then proceed to the construction sites of customers. The product carried is manufactured by customer and the assessees nowhere figure in the process of putting the property in transit mixers to economic use. The entire use in the property in goods is to be exclusively utilised by customer. The existence of goods is identified and the transit mixers operate and are used for the business of assessee. Therefore, conclusively it leads to the only conclusion that the assessee had transferred the right to use goods to customer.
Authors:
Atul Dua (atul.dua@sethdua.com) is a senior partner, Gaurav Gupta (gaurav.gupta@sethdua.com) is a senior associate with Seth Dua & Associates, Solicitors & Advocate, India